All Forum Posts by: John Leavelle

@James Wierzba

You need to have both reserves (CapEx and Repair/Maintenance). CapEx is for the big ticket items that will be depreciated over time. R/M are the month to month items claimed on current year tax returns.

Howdy @Jarrod Frankum

The calculator should reflect the correct numbers:  Purchase Price $24,000, Estimated Repair Costs $20,000.

The loan information is where they are combined.

How confident are you about your ARV? Purchase price? Repair costs? Rent? the reason I ask is your expense numbers are conservative. That's good. However, any increase in your costs reduce your already slim Cash Flow. When you Refinance you are required to leave a certain amount of equity in the property. In this case it will probably be 20%. So the new loan amount will be ruffly the same ($44,000) if the ARV is correct. The problem is the interest rate may be higher which increases your mortgage payment and reducing cash flow. So my question is what do you hope to achieve by refinancing? Removing PMI? Check with your lender. You may be able to do that without the refi after you reach 20% equity. Problem with that thought is you are starting with 3.5% equity. If you can get $55,000 for the new appraisal then you have a shot.

There is something you need to consider. As long as the property is not rented you are incurring Holding Costs. That can includes (but not limited to) mortgage payments, taxes, insurance, utilities, HOA fees, etc. In other words negative cash flow. Do you have the means to cover these costs until it is rented? You are required to stay in the house for at least one year because of the FHA loan. You should include this in your overall calculations.

Did you know you are required to use a licensed contractor to complete the repairs when using a 203K loan?

Personally I would not go for a SFR that will only cash flow $105.

Howdy @James Wierzba

There are a lot of issues you can run across with a property that old. It really depends on how previous owners maintained and updated it. Most definitely have the property inspected during due diligence. Many code issues can be hidden that you may not be aware of. You will have repair/maintenance needs because of the age. Things naturally break down. I noticed you did not include a CapEx reserve in your numbers. That could be up to another $165 per month. You need to have a good idea of the current condition and life expectancy of all the major components as well as the new appliances.

Make sure billing utilities to tenants is an accepted practice in that area.  That may be way the rents are higher for this property.

Howdy @Cory L Stevens

You really should provide more information in you post.  We need to know what type property/number of units, what is you plan/goal, type of financing you are using (Acquisition and Refinancing), are these the current rents, is there room to increase rents, class, etc...

Not sure how you think your will be able to get over 100% of ARV for the Refinance loan amount.

If you can provide the additional information I will be happy to provide a critic.

Howdy @Geoffrey Tanudjaja

What is your planned use for the property? It's a Single Family Residence (SFR), but, you are showing rent by room. Are you looking at renting to students?

You need to include Closing costs which are 2% - 5% of Purchase price.

You say the purchase price is $75,000. Yet you show $60,000 in your report. Which is it. How did you arrive at $75,000 for the ARV?

Why 15 years for amortization and not 30 years. A longer period will reduce the monthly mortgage payment which in turn increases your Cash Flow. Are you sure you can get 4.2% APR?

Is the property currently rented?  Are you using the current rent rates?  If not, where did you get your numbers?

You are missing a couple of key expenses. You need to include Insurance and CapEx. You can get free quotes for the insurance. The CapEx will probably be somewhere between 5% to 10% of Rental Income. It will depend on the age and current condition of the property. In lieu of the actual numbers you can get a reasonable conservative analysis of potential Cash Flow using the 50% rule ($315 per month). it tells me you may have a good deal. This also depends on the quality of the neighborhood.

Howdy @Diego Lopez

Overall I think your total reserves Vacancy, CapEx, Repairs) are a little high but still ok. I usually maintain around 20%. I start off with 10% for CapEx until I have the property inspected to determine the current condition and life expectancy of all major components and appliances. I adjust the amount after I decide what will be included in the Rehab and what will be deferred.

I agree with @Heath Ryans on 2 points.  Do not adjust your expenses to make a property cash flow better. They will occur whether you pencil them in or not.  Just because you budget for $$ in Repairs doesn’t mean that much will be spent.  Also you should always include PM in your analysis even if you plan to self manage.  First I’m a firm believer that your time is worth something.  Secondly, you may want to expand your portfolio and decide down the road to use a PM Service.  If you did not include it in your original analysis how do you expect to add it later.

@Gary Lawson

When I evaluate properties for cash flow I do have a minimum acceptable amount per unit to start with. $100 per unit for multi family and $200 for single family.  However, I also look for properties that I have room to raise rents after the Rehab.  As @Josh Stanley suggested I have made adjustments for BRRRR deals and lowered the Refinance loan amount in order to improve cash flow to an acceptable minimum. I do not want to make that a common practice since I am trying to reuse the same bucket of money over and over again.

As far as knowing what expense amounts to use. It can be a little more simple than you might think. I start my initial screening analysis using 55% for expenses and current rents for income. If they pass the initial looksy I start using individual expense estimates for a little more closer look. Yes, I use 10% for CapEx. Once the property is under contract I have it inspected to determine the current condition and life expectancy of all major components and appliances. I use this report and and the draft SOW to determine what will ultimately be included in the Rehab and what can be deferred. In most cases my reserves requirement is lower than the original 10%. My investment practice is to only hold properties for approximately 5 years. Then 1031 exchange them for larger ones. So anything not expected to last a minimum of 5 years is included in the Rehab.

For Vacancy I can care less how low a Seller or market average is.  I maintain a minimum of 8.34% in my analysis and budgeting.  That covers one months rent.  If the actual vacancy amount ends being lower then I made more money that year.

PM averages 10%.

Maintenance reserves depend on the age/condition of the property and the quality of tenants.  I like a minimum of $50 per unit.

You can get free quotes for insurance.

Taxes are easy to find.

Utilities.  Call the servicing Utility to get an average on the property.

Once you get a property under contract you will be digging deeper during the due diligence.

Holding costs include (but not limited to) loan payments, insurance, taxes, utilities, HOA fees, etc., that occurs during the Rehab period and up until the property is fully rented. This includes negative cash flow. I routinely use $6,000 initially for Holding Costs estimates for my analysis.

Gary, be sure you understand what is considered CapEx and what is OpEx (Repair/Maintenance) in your Rehab. It makes a difference from a tax perspective.

I agree you seem to be going in the right direction with your analyzing.

Howdy @Dwight Bryant

Why do you show $30K for Purchase Closing Costs?  It should be more like 2%-5% of Purchase price. That’s approximately $2K to $5K.

Howdy @Cathey Bayless

Your CapEx amount is fine. Maintenance/Repairs may need to be more if you plan to maintain the property as student rentals. I would increase the Vacancy for student rentals. Unless you know they will be renting through the summer months. Otherwise your property might be fully vacant for 3 months every year. 5% would not even come close to covering that. 8.34% equals one month rent.

Howdy @Alexander Hamilton

Are you planning to Refinance all three properties together?  If so I think you need to re-evaluate the type of loan you will be able to get.  6 units would be a commercial loan.  The terms will be significantly different.